When people face this question about why people lie sometimes and don’t lie other times, the common answer has to do with something about the internal state about the person. The person is hungry, is tired, is exhausted and there is some truth to that. There is some changes that happen to us internally that make us cheat more or less. In particular, one of the things we find is being mentally exhausted gets people to cheat more, and here is the finding: There is something called depletion. Depletion is the idea that when we exercise self control, when we try to resist temptation, we try to resist a cake and a cookie and Facebook and Youtube and saying something nasty to someone and so on. As we try and resist temptation more and more and more our ability to resist temptation diminishes until eventually we kind of collapse and give in.

Dishonesty is one of those things. As we get tired by resisting temptation in all kinds of aspects of our lives we end up falling to temptation to a higher degree and cheat and lie to a higher degree. So, going back to the question about why people lie sometimes and not other times, there are clearly changes that happen within a person over time, but what we find is that an even bigger effect has to do with the environmental circumstances that are around us. So, often we think about people as agent, so we decide and we act, and we act on our preferences and we are kind of executing our own internal state, but the reality is that the decisions people often make are best described by the environment in which they are placed. When we place people in some environments they are able to cheat to a higher degree and when they are placed in a different environment, that same person with the same mindset ends up cheating to a much lower degree.

So what are those environmental influences?

One of them has to do with the degree to which we can justify our dishonesty and, in particular, the distance of the dishonest act from money. So for example, in one of our experiments we found that, the basic experiment looked like this, people have a sheet of paper with 20 simple math problems that they can solve all of them if they had enough time, but we don’t give people enough time. We give people only five minutes, we give them the sheet of paper, we say “work as hard as you can” and when the five minutes are over we say “please stop and count how many you questions you got correct, remember that number then go to the back and shred that sheet of paper. Then come back and tell us how many questions you solved correctly and we’ll pay you accordingly, a dollar per question.” Now, what people don’t know is that we played with the shredder, the shredder only shreds the side of the page, but not the full page and we can jump in and find how many questions people really solved correctly.

So what did we find? We find that on average people solved around four problems and report to be solving six. Okay, that’s a general finding, and we find that the six is not comprised of a few people who cheat a lot, instead it’s comprised of many people who cheat a little bit. But, in another condition, what we do is we ask people to shred the piece of paper, and when they come to us not to say “Mr. Experimenter, I solved X problems, give me X dollars”, but to say “Mr. Experimenter, I solved X problems, give me X tokens”. Now, people look into our eyes and lie for pieces of plastic and not for money and what we find was the people basically doubled their cheating. What that means is that when we have an environment in which people can distance themselves from the act of cheating, they’re not cheating for money, they’re cheating for a piece of plastic, all of a sudden this environment can facilitate to a much higher degree. There are many other influences like this and what this means is that we need to think about the environment, we need to think about regulation, we need to think about rules, we need to think about professional cause of ethics because those things eventually have much more to do with how people behave than individual personality.

Why do students cheat on tests when it will effect them later on in their lives?

So first of all, I think that students for sure, but most people in general, don’t think much about what will happen later in lives, we have this general problem of thinking about short-term and not thinking about long-term and this is everywhere, right, it’s about why we over-eat and under-exercise, and under-save and text and drive, don’t take our medication on time and have unprotected sex, all of those behaviors are due to the fact that we don’t think about long-term.

In the rational framework of course people always think about the long-term and in the rational framework of cheating people think in the long-term, but in reality we find that people don’t think so much about the long-term. And this means, by the way, that the rules and regulations and laws that rely on the long-term, that rely on prison sentences, and probability that someday somebody might catch you are much less effective then we think because when we are creating the rules and regulations we have in mind a rational agent who thinks in the long-term and human beings are not like that and college students are of course the same.

Can you name a situation when somebody was dishonest and it backfired on them? What about when somebody was honest?

So of course there are many cases where dishonesty has backfired and I think the best example of this is the financial crisis. When Greenspan went in front of Congress he said that he thought that companies would self-regulate themselves, right, that the individual traders and bankers of course have an incentive to be dishonest because they get to pocket a tremendous amount of money from this activity- something that is good for them in the short-term, but maybe not so good in the long-term. But, for the companies this is really bad, the companies can go bankrupt. I mean, in fact there was just a story recently of a trader who basically caused his bank to lose 2 Billion dollars by misbehaving.

So, there’s lots of examples like this when individuals are misbehaving dishonestly in the short-term and not thinking about the long-term and companies are not sufficiently successful in regulating this behavior. In terms of being honest and it backfiring, it depends on what you mean by “backfiring”. So, of course, if you work in a bank and your bank people are perfectly honest, and then you have other banks where people try all the funny procedures and they don’t have Chinese walls and they sell stocks that are not good to their clients to take them off of their hands and so on. All of a sudden if you’re honest, you would do well by your clients, but you would be less wealthy.

And actually, one of our findings is that people’s standards for morality are dramatically influenced by the behavior of people around them and I think that if you have a situation where bankers are friends with bankers and politicians are friends with politicians and they see people in their social circle misbehaving in a dishonest way there is basically a temptation to match that behavior and find a similar behavior, find it socially acceptable, follow up on it and continue behaving this way. And of course, the really sad thing about it is that those things have a propensity for a slippery slope and escalation, which I think is exactly what we’ve seen over the past few years and sadly I have not seen any serious attempt to stop this escalation and even to reset it, but we have to because we are getting into a worse and worse situation over time.

Based on your research, what motivates people to behave dishonestly?

What we basically find is that people are a nice combination of economic incentives and psychological incentives. Our economic side of us wants to benefit from cheating, because cheating benefits us in the short-term. Now, it might not work for us in the long-term, but because we don’t think about the long-term, we focus on the short-term. On the other hand, we have the psychology side of us, which makes us want to feel that we are honest, moral people. We want to be able to look at ourselves in the mirror and feel good about ourselves. It turns out we are a combination of both of these forces. Now, you could say that you could do one or the other, you could look in the mirror and either feel good about yourself or you could be dishonest, you can’t do both. But, it turns out that due to our flexible psychology, we can do both as long as we cheat just a little bit.

As long as we cheat just a little bit we get to benefit from cheating, just a little bit and we get to think of ourselves as honest people. So the way to think about it is, imagine that you went with a friend to dinner 10 times over the last year and then you ask yourself, can you submit those things as expenses to the IRS on your report and, you know, maybe you would not feel comfortable submitting all 10, but two or three you would feel okay with. And that’s basically what we find, people kind of make their own judgment and as long as we cheat just a little bit, we benefit from cheating a little bit, but we can still think of ourselves as honest, moral people. It’s this psychological game that’s all around rationalization that is incredibly important to understand because that is where dishonesty in the market comes from and if we hope to stop it, we need to stop this ability that we all have to cheat a little bit and quickly rationalize our actions.

What can your book teach us about how we should manage our careers?

Well, it’s about managing our career and other people’s careers. You can speculate that there are basically bad apples out there, that some people are bad and some people are good. All the only thing you want to do is make sure you are a good apple and not a bad apple and that your company doesn’t hire bad apples and that you don’t have bad apples as friends. But, the reality what we shown in the research is that we all have the capacity to become bad apples. Of course, there are some psychopaths out there, but outside of those very very few individuals all of us basically have the capacity to start misbehaving and over time increase our misbehavior step by step until we become quite rotten. The question of course is how do we stop it because it is not as if people start their lives wanting to end being corrupt and having a chance of being caught and going to jail, but we do it step by step without thinking too much about what we are doing.

It’s as if, I’ll give you an example of an accountant who I talked to at some point, this was the CFO of a big company and their company was making money, but one quarter they were shy of Wall Street expectation and the CEO came and talked to him and said “oh, you know, we’re so close, we’re almost, can you make the books a little better?” and without thinking much, without thinking they were doing anything really bad he kind of fixed the book just a little bit because they were actually making money, they were making money, they were very close, they were almost there, it was just a question of how they formulate the books and think about it. Of course, they found justification for that, but of course the next quarter was harder to justify and harder to justify until things became too bad. Eventually he ended up in jail.

He wasn’t thinking when he started that this would be the end game, but it did become the end game because it was time after time after time, slightly one step after the other without thinking about the end game. I’m not saying that we’re all likely to kind of behave as badly as this CFO, but the reality is that we have a much higher capacity for this behavior than we realize and we really have to create very strict rules and regulation to protect ourselves against it. And, by the way, the same thing works for me and the same thing works for science. We often think that rules and regulations are to protect other people from our misbehavior, I think they also have an incredibly important meaning to protect us against ourselves.

They are basically to protect us against misbehaving in ways that we, ourselves, wouldn’t want to. Finally, I should say that I think of dishonesty as one, but great, example of irrationality, there is many irrationalities, we have many odd and curious instincts and many odd and curious quirks and motivations and dishonesty is one of them. If you think about it from this perspective, it is something that acts on us not within the rational framework. There are things that are rational that don’t influence us and irrational influences that do influence us. On top of that, we don’t exactly understand how it works on us and because of that we really need to rely on science and findings, rather than our intuitions when we come to think about how to create a better environment or better regulations or how to protect ourselves.

Dan Schawbel is the managing partner of Millennial Branding, a Gen Y research and management consulting firm. He is also the #1 international bestselling author of Me 2.0 and was named to the Inc. Magazine 30 Under 30 list in 2010. Subscribe to his updates at Facebook.com/DanSchawbel.

Commentary: Asian currencies will grow in influence

BEIJING (MarketWatch) — When I ponder the impact on the West of China’s slow but steady progress in liberalizing its financial markets, Napoleon’s oft-cited description of the Middle Kingdom comes to mind. “A sleeping giant. Let him sleep! If he awakes, he will shake the world.”

The message from around a dozen recent exchanges with top Chinese financial decision-makers and advisers is very clear. China’s financial market liberalization is now more or less unstoppable. This is being expanded now in many fields, with consequences for many sectors of Western business and finance. Much of this has yet fully to be acknowledged by the West, let alone understood.

National emblem of the People's Republic of China (Photo credit: Wikipedia)

China inflation exceeds forecast

China’s consumer inflation gathered pace in March, but probably not enough to deter central bankers from easing monetary policy to boost the economy in the months ahead. Aaron Back reports on the News Hub. Photo: Reuters

Opening up of China’s previously closed financial markets has been building cautiously for several years. The move was put on hold by the aftermath of the financial crisis in 2007-08. It could still be impeded by a further sharp world downturn or another type of international dislocation. However, Beijing’s financial liberalization policies have accelerated as a result of the latest signs of disarray surrounding the world’s two principal reserve currencies, the dollar and the euro.

The liberalization extends to use of yuan USDCNY -0.0032% in international capital market transactions especially in Hong Kong, which has been a laboratory for offshore yuan bonds, in international trade invoicing and settlement, and in international reserve holdings (where 10 to 15 central banks worldwide now own serious amounts of yuan.)

The same is true for easing controls on the value of the yuan (which is unlikely to appreciate as much as it has in last 12 months and could fall as well as rise) and for liberalization of interest rates in China (which is an essential quid pro quo for allowing Chinese institutions and citizens more freedom to invest abroad).

There is considerable linkage to the latest Five-Year Plan for promoting domestic-driven growth and rebalancing exports and imports. As Liu Mingkang, former chairman of the China Banking Regulatory Commission, now a distinguished fellow of the Fung Global Institute in Hong Kong, told the Boao Forum on Asia last week in southern China, liberalization of financial markets is “part of a package”. This is not a piecemeal approach, but part of a series of building blocks, he said.

The moves forward on the yuan are linked to China’s visible frustration and disillusionment on key issues of international economic governance and also on the performance of private-sector Western financial institutions during the financial crisis, for example in the fields of corporate finance or asset management.

However, China will take a steely line on gradually fostering capital account convertibility, declaring that the yuan can be used more internationally while at the same time remaining partly inconvertible. In the same vein, China is very far from being starry eyed about the overall process, emphasizing that it will reserve the right to “shut down” liberalization at times of turmoil — for example, if it ever seemed likely that we were preparing for a rerun the 1997-98 Asian financial crisis. (Note, though, that influential personalities such as Jin Liqun, chairman of the supervisory board of China Investment Corp., say not capital account liberalization, but faulty economic policies, led to the Asian upheavals of 15 years ago.)

Will the changes be good for the rest of the world? Only up to a point. There are several aspects of China’s financial market liberalization that the West needs to analyze carefully — for they may bring considerable challenges and possible setbacks.

• China’s strong line on international economic governance will eventually mean fewer jobs for the Western “boys” (and girls) at the World Bank, the IMF and other international bodies.

• Although China still see the Europeans as useful allies with whom to push for changes in U.S.-dominated economic fora, Beijing is clearly intensifying its reliance on the other BRICS countries (Brazil, Russia, India and South Africa). Until it solves its internal difficulties over the euro (which won’t be anytime soon), Europe will not really count for much in the world (although individual countries like Germany might).

• China has no wish to destabilize the euro for the time being, since it relies on Europe for an increasing proportion of its trade. However, over time, probably both the yuan and the Japanese yen will become more international. (Japan is likely to undergo an international renaissance as the Tokyo authorities seek to find way of borrowing more funds abroad). The increasing global clout of the Asian currencies will certainly increase the vulnerability of the euro to outside buffetings.

• Higher foreign earnings from international capital market and asset management activities will further increase the power, profitability and status of Chinese banks. Their earnings will come under pressure from liberalization of Chinese interest rate-setting arrangements, but better conditions for foreign business should provide adequate compensation. Watch out for Chinese banks moving into areas of asset management, trade finance and project finance where Western banks previously held comfortable positions.

• When it comes to international borrowing, the Chinese will comply with requests for funds only if Western debtors agree that borrowings should be denominated at least partly in yuan, both to intensify generally the currency’s international use and to protect the creditor against exchange-rate losses. Such a stipulation, discussed from time to time in past months, may climb gradually up the international policy agenda in the coming year.